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Lockdown effect on Manufacturing PMI

Context: The month of April that was marred by ‘’Lockdown and Quarantine’’ brought the worst for the businesses in India as far as Purchasing Managers Index (PMI) is concerned.

More on the news:

The IHS Markit Purchasing Managers’ Index (PMI), that provides an early gauge of manufacturing activity, dipped to 27.4 in April.

It comes as a steep fall from the 51.8 figure in the preceding month.

A reading below 50 shows contraction in manufacturing activity.

Reasons for such contraction

Demand Side Issues

The acute contraction in PMI was expected as economic activity beyond the permitted essential goods was non-existent.

India’s PMI is in line with other economies, such as the US, the UK, and Japan, where also lockdown has restricted economic activity.

The US composite PMI had dropped to 27.4 in April, while that of the UK was down to 12.9. With these markets shrinking, export orders fell at the fastest pace ever.

Supply Chain Disconnections

Mobility restrictions between district borders has rendered a big blow to supply chains.

The PMI survey also noted laying off of resources in several businesses.

There was a similar trend in purchasing activity, with firms cutting input buying at a record pace.

Glimmer of Hope

Though the lockdown has been extended, several relaxations have already been granted by the government.

With standalone shops being allowed to operate, small businesses mayreturn to normalcy.

Private businesses have also been allowed to resume work in most areas, with certain restrictions.

The manufacturing is expected to ramp up only gradually as three-four weeks of inventory exists in the system.

The demand revival, too, seems to be gradual.

Despite the expected pain in the economy and the uncertainty, stock markets have been buoyant through April on account of high stimulus, low level of interest rates and also SIP buying in the mutual funds market.

Purchasing Managers Index (PMI)

About

PMI can be defined as an indicator of business activity pertaining to both the manufacturing and services sectors.

For India, the PMI Data is published by Japanese firm Nikkei but compiled and constructed by Markit Economics.

Methodology

It is a survey-based measure that asks the respondents about changes in their perception of some key business variables (New Orders, Output, Employment, Stocks of Purchases etc.) when compared to previous month.

It is calculated for the manufacturing and services sectors in a separate manner and then a composite index is reached upon.

The headline PMI varies on a scale from 0 to 100.

A PMI score of above 50 represents an expansion while on the other hand a PMI reading under 50 represents a contraction, and a reading at 50 indicates no change.

The PMI is usually released at the starting of the month.

Advantages of PMI

The PMI is published on a monthly basis, while on the other hand, most of the government data series, such as GDP, are published every quarter.

PMI surveys are one of the first indicators of economic conditions published monthly, making it a good leading indicator of economic activity.

Official data like GDP are frequently subject to substantial revision which makes it difficult to make business decisions while PMI data are not subject to revision after first publication.

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